A fundamental Euro flaw

Published in Business Spectator (Melbourne), 16 December 2010

As the leaders of the European Union gather for their last big summit of 2010 in Brussels today, the attention will once again be on the future of the Euro. The discussions about investor haircuts, Euro bonds, and a reformulation of the European treaties are important. But they are also a distraction from the fundamental flaws of the European project.

There are good economic reasons for Europe’s economic crisis. The fiscal catastrophe across the continent is the result of decades of reckless spending policies. Economic structures have been severely distorted by common interest rates that were too low for some countries (e.g. Ireland and Spain) while still being too high for others (e.g. France and Germany). Finally, the Euro has blocked the conventional relief valve for struggling economies, namely devaluation.

It is right to deal with these problems in detail, and after a year of Euro crisis there is certainly no lack of analyses. However, the focus on the technicalities of monetary union should not prevent a look at the greater picture. All the problems of the European Union can be understood as a result of the constructivist roots of the European project. It is this project’s philosophy that is flawed, and the EU’s economic crisis is just the practical consequence.

The European Union is a prime example of constructivist hubris as described by Friedrich August von Hayek, the economics Nobel laureate. Hayek defined constructivism as the belief that man had not only created all social and cultural institutions but that these institutions could easily be changed according to man’s wishes and beliefs. This conception follows from a rationalist view of society, which goes back to René Descartes and Voltaire and stands in marked contrast to the British empiricist tradition of John Locke, David Hume and Adam Smith.

Summed up briefly, the constructivist believes that anything in society can be altered and improved. As Voltaire put it: ‘If you want good laws, burn those you have and make new ones.’ To the empiricist, any such attempt is dangerous. It ignores that social structures may well be the ‘result of human action, but not the execution of any human design’, as Adam Ferguson formulated it way back in 1767.

It was Hayek who almost two centuries later turned this basic insight of the empiricist tradition into his theory of a spontaneous order of society. For Hayek, social and economic structures depend on dispersed knowledge which is too complex to be centralised by any one mind. This is also the reason why disregarding grown institutions is bound to fail, Hayek claimed.

Looking at the current state of Europe, it is easy to understand what Hayek meant. The European Union has always been a project that was imposed top-down on the peoples of Europe. Its construction was driven by intellectuals and politicians who had come to the conclusion that peace and prosperity could only be guaranteed by creating a supranational structure for the continent.

Maybe this was understandable following the unprecedented destruction caused by the two World Wars. However, this does not detract from the fact that the path towards ‘ever closer union’, as stated in the preamble of the EU’s founding Treaty of Rome in 1957, did not start as a popular movement but as an ideal designed in political and academic circles.

The character of ‘Europe’ as something artificial has stayed with the EU until the present day. Despite almost six decades of political integration, national peculiarities and differing national interests have not disappeared. If anything, they have become even stronger as the Euro crisis now demonstrates almost on a daily basis.

As Václav Klaus, the Czech president, pointed out not long ago, Europe lacks everything that is required for a state. There is no European nation but only European nations; there is no European cultural or ethnic homogeneity, either; there is not even a ‘shared memory’, which could form the basis of any history writing.

The elements absent from the emerging European superstate are obvious. For a construction with its own government (the EU Commission) and parliament, it is startling that no common European public opinion has yet developed. There is not even a pan-European newspaper to report EU proceedings – and in which language should it do so anyway?

The Euro currency itself is a good example of Euro-constructivism. Currencies need to be trusted and therefore their symbols are of immense psychological value. The Euro’s founders neglected this basic insight at their peril.

The Euro got its meaningless name based on the smallest political denominator since the French would not have accepted a ‘mark’ while the Germans would not have agreed on the ‘franc’ or even just the French sounding abbreviation of European Currency Unit, ECU (as a matter of fact, the écu d’argent is also the name of an old French coin).

The Euro’s arbitrariness and artificiality continues in the design of its notes, which depict windows and bridges. As the European Central Bank states on its website these are ‘stylised illustrations, not images of, or from, actual constructions’. Europe hardly suffers from a shortage of historical buildings. That none of them was chosen for the notes gives us a clue how strong national sentiments still are. It is easy to imagine what had happened if, say, the Coliseum had been on the 100 Euro note, the Eiffel Tower on the 20 Euro note, and the Brandenburg Gate only on the tenner.

If Europeans were not able to find a more meaningful name and design for their common currency, what are the chances they could have agreed on any more substantial issues? To ask this question means to answer it. The chances for broad agreement on the principles of monetary, fiscal and economic policy had always been minimal. The countries of Europe were – and still are – too different.

On a philosophical level, Europe’s crisis can be interpreted as a practical lesson in the errors of constructivism. It shows what happens if grown economic and social structures are wilfully ignored and replaced by systems designed in academic ivory towers and the backrooms of power.

From an Australian perspective, Europe’s troubles do not give any reasons for glee. Political constructivism is alive and well all over the world. Stimulus packages, ambitious education schemes and the national broadband network all suffer from the same flaw. By putting design over experience and planning over evolution they carry the seeds of their own destruction.